The effects of market fragmentation on the quality of the European equity market

Abstract

This dissertation analyzes the effects of lit and dark market fragmentation on market quality and, more specifically, on market liquidity. Several empirical studies tried to determine whether fragmented markets are characterized by more drawbacks than consolidated markets, obtaining very different results. However, the most recent literature seems to be in favor of a higher level of fragmentation, in imitation of the American competitive model. Since 2004, the European regulators started to revise the legislation, succeeding with the Markets in Financial Instruments Directive as the first step for a more transparent, efficient but above all competitive market. The 2008 – 2009 financial crisis made it clear that a more robust regulatory framework was necessary to address the development of new trading platforms and activities that have arisen and spread after the introduction of MiFID. The MiFID II, introduced at the beginning of 2018, aims primarily at reducing the volume of trades in the dark markets and increasing competition among the various venues. Being too early to draw conclusions about the new European directive, this thesis analyzes the change in the various types of trading venues over the years and uses an empirical study in order to verify how the liquidity of the market has changed in the last decade due to fragmentation.